December 2018 Portfolio Update

This post marks the completion of a whole year of monthly portfolio updates and with continued market volatility and sudden, daily lurches in portfolio value this has been another difficult month. That said I've now come to terms with the strategy that works for me (psychologically if not financially). This is one where I selectively top-up (or add) holdings when their valuation is at the low end of the historical range so long as trading is still improving for them - the theory being that it's deflation of their valuation multiple which has bought the price down rather than a fall in earnings. In the short term their prices may fall further but in the long run it's certain that the price will rise again so long as they continue to grow and increase earnings.

This is a marked improvement on how I felt during the initial October falls where I really suffered from cognitive dissonance. On one side I half wished that I'd somehow predicted the crash or reacted to over-stretched valuations within my portfolio holdings and sold early. Then, when I hadn't done this but instead found myself confronted by a wall of alerts as prices fell 20% or so, I dithered over whether I should sell almost everything. In retrospect I should have got rid of all of my shares at the time but I'm generally reluctant to sell when an underlying business is still trading well and growing. The problem, of course, is that predicted growth can quickly fall away when the economy falls into recession but I still don't know whether this is on the cards or not.

Anyway having spent some time reviewing the valuation levels of everything that I hold, or would like to hold (from my watch-list), I have a much better feel for how cheap/expensive these shares are compared to their long-term history and at what level I feel confident making a purchase (or a sale). From this perspective, with prices 30-40-50% down, we're a lot nearer the bottom than the top when it comes to valuations - unless we're about to have a financial melt-down as in 2008. With the possibility of a no-deal Brexit in 4 months time this is not an outcome that can be lightly dismissed but I'm an optimist and find it hard to believe that our political 'elite' will let that happen. On the upside I'm no longer fighting with myself over how best to handle the situation and that's half the battle with being an investor.


IG Design Bought at 602p - December 18

The recent interim results from IG Design were notably excellent with their recent acquisition of Impact Innovations adding higher-margin profits and geographic diversification. Looking at the results I was initially underwhelmed by the organic growth rate in the US but having watched this excellent PI World video it's clear that this is a timing artefact. In fact, at the time of the video, these delayed sales had already unwound. The other big takeaway for me, from this presentation, is just how effectively the business is being operated and how much scope remains to grow sales and reduce costs. Both of these bode well for continued improvement in profit margins and I remain impressed at how well management are acquitting themselves. That said I might have been a little hasty to top up here, considering market conditions, but I don't see IGR as expensive (given their growth rate) and in a few years time I expect this to be a much larger business.

Palace Capital Bought at 289p - December 18

The recent results from Palace Capital indicate that NAV per share has increased slightly to 421p and that they're running many schemes to increase it still further. I'm not surprised that the share price is nowhere near this level because the company haven't maintained the velocity of their early success a number of years ago. Nevertheless the discount to NAV has always remained modest with an average discount of just under 16%. Recently, however, the share price has collapsed as sentiment around Brexit, the future of the high street and shares in general has soured. This change has lifted the discount to in excess of 30% and I see this as offering up a buying opportunity since their exposure to department stores, casual dining and the London area is limited while they have plenty of scope to buy additional assets if sector valuations fall drastically. Meanwhile there's a yield over 6% to keep investors happy. So one to hold for the long-term.

Somero Enterprises Bought at 294p - December 18

This is a long-term holding of mine due to the high quality of earnings, non-UK revenue profile and generally low valuation. Nevertheless Somero has been sold off, along with the rest of the market, falling almost 30% as the price has dipped below 300p. Looking at the forecast earnings of 38c (~29.8p) this puts the share on a forward P/E under 10 and a yield well over 5%. While I'd agree that Somero operates in a cyclical sector (construction), and thus doesn't deserve a premium valuation, equally I see it as materially under-valued right now (especially considering that more than 10% of the market cap is in cash). So I've upped my holding here by 10% and may do so again if this bear market presents another opportunity.

3i Group Bought at 769p - December 18

Recent results from 3i were very positive with NAV per share up 10% to 776p. While much of this gain was driven by their largest holding, the discount chain Action, other investments are also performing well - especially their holding in the publicly quoted 3i Infrastructure Fund. I appreciate the international diversity of these investments and also the fact that they're cautious about the pricing of new investments and have a strong enough balance sheet to deal with market turbulence (unlike in 2008). From a valuation perspective 3i historically trades at a premium to its NAV and any fall below the NAV has reversed relatively quickly. In addition the P/E is around 5 while the well-covered dividend is over 4%; so while EPS is a relatively meaningless figure for an investment company the yield has rarely gone above 4% over the last 14 years. Another decent opportunity then!

Plus 500 Bought at 1376p - December 18

Back in September I sold out of Plus 500, as the price fell despite strong results, and from there the price fell another 10% in October. However in the last few months stock markets have been very volatile, as we all know, and this has driven business towards PLUS. As a result the company has put out three trading updates (in October, November and December) with each one indicating that profits will be ahead of expectations. Despite this the share price is exactly where it was when I sold out out and therein lies the opportunity. Obviously there remains some uncertainty regarding the impact of ESMA regulations on user acquisition costs and average revenue per user but offsetting this I see market volatility remaining high for the foreseeable future.




Impax Asset Management: Good results here with no surprises. As expected revenue and earnings more than doubled as a result of the Pax World acquisition. This seems to be bedding in well although there has been some outflow (£118m) from these new funds; in contrast the existing Impax funds have seen high net inflows (of £1.7bn) and good performance during the year (adding another £0.5bn to the AUM). Overall AUM is up to £12.5bn out of which adjusted PBT of £19.2m was generated (equivalent to EPS of 12.4p). Looking forwards analyst estimates are for 10-20% revenue growth in each of the next two years although with profits rising more slowly. I don't know why this is since I would have thought that fixed costs would rise much more slowly than assets with margins strengthening. Having tracked down this broker note it seems that operating costs will rise 25%, in their view, with revenue up 19%. Seems a bit odd. They also make reference to the closure of the real asset fund, NEF2, making a one-off boost to profits (and providing a special dividend for investors). In the long run Impax is running the kind of funds which attract investors and so, while next year won't be as transformational as this one, I expect them to keep growing for a good while yet. (Results)

Games Workshop: After the last pensive update this one's a lot more positive with sales up to ~£124m and operating profits around £41m. This is all in-line with expectations but I can't help feeling that they're actually trading better than the analyst forecast of £235m in FY sales with a an EBITDA of £76.5m. Anyway the results will be published mid-Jan and we'll have a more detailed picture of exactly where the sales growth is coming from. In the meantime we're getting yet another 30p dividend from truly surplus cash - just in time for Christmas! (Update)

Hollywood Bowl: With the share price flat-lining at 200p for exactly a year, since the FY17 results, I was beginning to wonder if BOWL was about to fall into the "recent IPO" trap and disappoint. This certainly seemed on the cards after a hot summer combined with consumer uncertainty. Fortunately the group has traded well with LFL sales up 1.8% and EPS up 2.9% as margins have improved. Even more impressively debt has dropped 69% to just £2.5m and there's enough cash around to fund a 4.33p special dividend (putting the effective yield at over 5%). To my mind this suggests that management are working hard to control costs and squeeze additional profit from their assets - which is why average game spend has increased 6.1% to £9.22. Looking forwards two new centres will be opened in FY19 with leases secured for centres opening up until 2022. With 58 centres in operation this will drive steady, rather than spectacular, expansion which ties in with analyst forecasts for high single-digit growth in the next few years. For more than this we'll need acquisitions and BOWL certainly has the means to finance any purchases. Steady progress then with a very solid income stream. (Results)

B.P. Marsh: Useful update here on LEBC Holdings since this is the largest position held by the company and thus rather material to performance. It seems that LEBC revenue rose 13.1% with profit up an excellent 43% (not including the acquisition of Aspira). It sounds as though everything is going well here and LEBC continues to look at options for a liquidity event - which could result in a decent uplift to NAV for BPM. Certainly I think that the downside is pretty limited with this investment given that it's trading at a 15-20% discount to its NAV and this NAV could well be under-stated. (Update)

RM: I've been watching RM for a while as there's been a bit of a battle between a weak share price and earnings momentum versus the cheap valuation and decent quality metrics. With this update it's clear that the group is trading well with organic growth in RM Resources and RM Results plus bought in sales from the Consortium acquisition. Cash generation must also be pretty good as net debt has reduced by £7m to a mere £6m. Sure this isn't the most exciting company in the world but it is dirt cheap at this price with a P/E ~8 and a yield nearing 4%. (Update)

K3 Capital: Surprisingly robust during the recent volatility K3 Capital has seen significant revenue and profit growth in H1 with this expected to continue into H2. There are also a record number of opportunities in the Corporate Finance pipeline which bodes well for the full-year. So it's a little odd for such enthusiasm to end with this being an in-line trading statement - especially when broker expectations are for a 7% drop in profits this year! I'll have to see if Finncap put out a research note and explain their thinking in more detail. In the meantime though I'm happy to stick with K3C as it grows the business. (Update)

Focusrite: With TUNE being on a fairly high P/E rating for rather low forecast growth the last update (talking of "broadly similar" trading) was a little disappointing. However it turns out that November was a good month and sales are now ahead of the same period a year ago. Given that Christmas trading was surprisingly good last year perhaps this is a sign that Focusrite will benefit this time around as well? (Update)

Keywords Studios: It's no great secret to say that the share price decline here has been monumental with a peak-to-trough fall of 49% in the last 4 months. Very painful. That said the share looks good value at the moment with forecast growth of 231% in 2018 and 20% in 2019 comparing favourably with a P/E of ~24. Obviously it's hard to achieve such expansion but with this update the board expect adjusted PBT to be within the range of analyst forecasts at around €37m on revenues in the region of €250m (around €258m on a constant currency basis). This is pretty close to the consensus figures of €258m and €39m that I can see on Sharepad and so I agree that trading is in-line. Possibly a buying opportunity? (Update)

End of month summary

There goes another month of geopolitical uncertainty with yet more wide-ranging falls across my portfolio. Whether or not we're in a bear market depends on your index of choice but we're definitely past this being a simple correction and are now in risk-off territory. Looking forwards company earnings in general appear to be under pressure with growth estimates falling both here, as Brexit rumbles on, and in the US as Trump enters the second half of his presidency. Set against this I can see quite a few quality shares that are within 5% of my buying price (which is when their forward P/E hits the lower-bound of their historical range) with a small number trading below a very decent entry price. With these companies all I'm looking for is a solid trading update to tip my hand and by my calculations about half of my watchlist shares are due to report in January or February; could be a busy start to the year then!

As for December well Hollywood Bowl bounced hard following decent results while Burford Capital has done the same on news of a large fund-raising from a sovereign wealth fund (with more to come in the future). Sadly these holdings couldn't mitigate the impact of continued weakness from Keywords Studios while Zoo Digital reversed its rise from November - never mind the long list of laggards with their single-digit price falls. A tough month for most small-cap investors it seems.

Winning positions for the month: BOWL 19.5%, BUR 9.4%, RWA 7.8%, PCA 7.8%, HAT 7.7%, WJG 4.8%, RM 3.8%, PPH 3.1%, RFX 2.4%, IPX 1.7%, TUNE 1.1%, BPM 0.7%, GAW 0.2%

Losing positions for the month: ZOO -22.3%, KWS -12.9%, FDM -12.6%, XPP -9.3%, GAMA -9.2%, BOOT -8.6%, BVXP -8.5%, NRR -6.8%, SBIZ -6.3%, DOTD -6.1%, ADT -6.0%, SOM -5.6%, IGR -5.5%, K3C -4.9%, III -4.5%, PMP -3.1%, BKS -2.7%, SCT -2.3%, BMY 1.9%, BOY -1.3%, VLE -1.0%

Another fickle month with some notable losing positions dragged my portfolio down by another -1.2% and so my year as a whole performance has slipped further to -4.5%. While I'd rather that this was a positive number I'm not all that bothered by this being the outcome when you look at how heavily the indices have fallen. In addition this reversal has forced me to take a harder look at my approach and put in place additional monitoring tools (while jettisoning the idea that hard stop-losses can work for me). With all of this in place I'm actually quite looking forward to 2019 - bring it on!

Disclaimer: the author holds, or used to hold, all of the shares discussed here

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